August 3, 2018
Authored by: William Easley
“I think now that I’m older, I do think I’m the greatest receiver to ever do it.” -Randy Moss, Receiver, probably not talking about Fed. R. Civ. P. 66.
Editors’ Note: Will Easley of our Kansas City restructuring & insolvency practice knows about NFL receivers. He also knows about the far more exciting receivers appointed under Federal Rule 66. If you want to talk about either, or both, give him a call!
Even if you know the best receivers in the game, they cannot preserve your collateral if a court will not appoint them. In federal court, a receiver is usually only appointed when the plaintiff shows fraud or other threat to the collateral. For creditors who have the Randy Moss (or the objectively better Jerry Rice) of receivers, and a provision allowing appointment in the loan documents, this may come as a shock. Currently, there is a circuit split on the weight courts should give contractual provisions allowing the appointment of a receiver in the loan documents. While some courts treat the provision as granting a contractual right to a receiver, others treat it merely as a factor to be considered.
Normally, appointing a receiver is considered an extraordinary remedy only appropriate when the plaintiff’s interest in the property is at risk. See e.g. Varsames v. Palazzolo, 96 F. Supp.2d 361, 365 (S.D.N.Y. 2000); Aviation Supply Corp. v. R.S.B.I. Aerospace, Inc., 999 F.2d 314, 316 (8th Cir. 1993); Britton v. Green, 325 F.2d 377, 382 (10th Cir. 1963). “Although there is no precise formula for determining when a receiver may be appointed,” a court has discretion to appoint a receiver “only after evidence has been presented and findings made showing the necessity of a receivership.” Aviation Supply Corp., 999 F.2d at 317. In weighing the necessity for a receivership, the Court will generally consider the validity of the plaintiff’s claim, probability of fraudulent conduct, imminent danger that the property will be hidden, lost, or diminished in value, inadequacy of legal remedies, lack of a less intrusive remedy, and whether appointing a receiver will do more good than harm. Id.; Santibanez v. Wier McMahon & Co., 105 F.3d 234, 241-42 (5th Cir. 1997).
In light of this high standard, consenting to a receiver in the loan documents would seem to have minimal effect. At best, the contractual provision would show appointing a receiver would do no harm in light of the debtor’s contractual agreement. However, many district courts recognize that allowing the appointment of a receiver upon a contractual provision is imperative to give the creditor the benefit of its bargain. See e.g., Am. Bank and Trust Co. v. Bond Int’l Ltd., 2006 WL 2385309 at *7 (N.D. Okla. Aug. 17, 2006); Fed. Home Loan Mortgage Corp. v. Green, 1990 WL 58900, at *2 (S.D.N.Y. Apr. 27, 1990). However, other courts decline to treat consent to a receiver as dispositive and instead, treat consent as a factor to consider. See e.g. New York Life Ins. Co. v. Watt West Investment Corp., 755 F. Supp. 287, 292 (E.D. Cal. 1991); Sterling Savs. Bank v. Citadel Development Co., Inc., 656 F.Supp.2d 1248, 1258 (D. Ore. 2009).
Whether a particular circuit allows parties to consent to receiverships seems to turn on whether the issue is analyzed as a contractual issue or a remedy. When parties agree to a receivership by through contract, some courts argue that a receivership is no longer a drastic remedy because the traditional concerns in appointing a receiver, such as the borrower’s property rights, are not at issue in light of the borrower’s consent. See U.S. Bank, Nat. Ass’n v CB Sett;e Inn Ltd. P’ship., 827 F. Supp.2d 993, 998 (S.D. Iowa 2011) (stating the Court finds no reason not to enforce the terms which the parties agreed to). This may be because allowing the parties to contract for a receiver gives creditors and debtors more tools to address troubled debt. If the creditor knows it has the power to request a receiver, and knows that request will be granted, then the creditor will be more likely to extend risky credit.
On the other hand, other courts merely weigh consent as one of the factors to consider in deciding to appoint a receiver. New York Life Ins. Co. v. Watt West Inv. Corp., 755 F. Supp. 287, 293 (E.D. Cal. 1991) (weighing consent under the balance of harms analysis). In doing so, these courts focus more on the equitable nature of a receivership and the trial court’s discretion. PNC Bank, N.A. v. Presbyterian Retirement Corp., Inc., 2014 WL 6065778 at *4 (S.D. Ala. Nov. 13, 2014). These courts argue that allowing the parties to contract for a non-discretionary receivership would destroy the equitable nature of a receivership and usurp the authority of the district court. Id. (citing Sterling Sav. Bank v. Citadel Dev. Co. Inc., 656 F.Supp.2d 1248, 1261 (D. Ore. 2009). Thus, consent to a receiver is not dispositive and is only a single factor weighing in favor of an otherwise heavy burden.
A creditor’s contractual right to appoint a receiver under the loan documents will differ drastically between the circuits. Potential creditors need to consider the likelihood of succeeding on a motion to appoint a receiver to determine whether these provisions should be included in their loan. Otherwise, a creditor risks giving additional value, to only have their star receiver on the bench when it matters the most.